Scenario or Tasks You are the financial accountant at Aysha LLC, a company which

Question

Scenario or Tasks You are the financial accountant at Aysha LLC, a company which has been expanding rapidly and is now an extremely diversified company for its size. It currently own three companies with manufacturing facilities and two companies in retail sales. In addition Aysha LLC has plans to acquire Badar LLC, which is primarily in retail sales. Aysha LLC had decided to issue 100,000 equity shares to the shareholders of Badar LLC. Market value of shares of Aysha LLC is OMR 90 each fair value OMR 5,000,000. The company is operating lease assets for lease rental of OMR 800,000 p.a from next five rental of OMR 900,000 pa. Discount rate 10% PV of 5 years annuity at 10% is 3.7908 has Property, Plant and equipment at book value OMR 2,000,000, which has a which it has to pay years as compared to current market The book value of inventories of Badar LLC is OMR 1,600,000, and the net realizable value for such inventories are OMR 1,900,000. On the balance sheet of Badar LLC the Debtors amount shows an amount of OMR 2,040,000, and it has been assessed that OMR 1,600,000 will be collectible amount from the debtors balance. However, Badar LLC guaranteed that collection will not be less than OMR 1,800,000 Bader LLC has several intangible assets that are used primarily in marketing or promotion of its products. These intangible assets are not currently recognized in Badar LLC's financial statement. The unrecognized value of its brand name has a worth of OMR 60,000. Aysha LLC valued the customer list of Badar LLC as OMR 40,000. Also Bader LLC has a pending order which would earn a profit of OMR 400,000. Aysha LLC has valued that a competitor would have spent at least OMR 60,000 for obtaining this contract Badar LLC's sundry creditors and other liabilities to be taken over by Aysha LLC for OMP 1,000,000. Aysha Ltd will offer employment to the Managing Director of Badar LLc, appreciating his sincerity and effort to integrate the functioning of Aysha LLC and Badar LLC, by offering a contingent consideration of OMR 40,000. Aysha LLC is particularly concerned about goodwill computation at the acquisition date and any ongoing earning impact that the new standards may have. The company has asked for advice on the impact of IFR3 (Revised) 'Business Consolidation' and IAS27 (Revised) 'Consolidation and Separate Financial Statements'.

Explanation / Answer

a)computation of goodwill

Purchase consideration (100000 shares*90) 9000000

Less: assets acquired (4788280)

property plant and equipment 5000000

inventory 1900000

debtors 1800000

brand 60000

customers list 40000

pending order profit 400000

lease payment (3411720)

(900000*3.7908)

creditors (1000000)

goodwill 4211720

Task 2

full goodwill computations

In the full goodwill method, goodwill is calculated as the difference between the total fair value of the target company and the fair value of it net identifiable assets. Full goodwill method is mandatorily required by US GAAP and allowed as an option by IFRS (besides the partial goodwill method).

There are a lot of acquisitions in which the acquirer obtains more than 50% but less than 100% ownership. In such situations there are two possible methods for calculation of goodwill: difference between total fair value of company and total fair value of net identifiable asset (that is the full goodwill method) or the difference between purchase consideration and the acquirer's share of fair value of net identifiable assets (that is the partial goodwill method)

Partial goodwill method.

In the partial goodwill method, goodwill is calculated as the difference between the purchase consideration paid and the acquirer's share of the fair value of the net identifiable assets. In partial goodwill method, only the acquirer's share of the goodwill is recognized. Goodwill under full goodwill method exceeds goodwill under partial goodwill method by the non-controlling interest share of the goodwill.

Partial goodwill method is not allowed under US GAAP but it is allowed as an option under IFRS (besides the full goodwill method).

Goodwill under partial goodwill method differs from goodwill under full goodwill method only in situations in which investment by the acquirer is less than 100%.

task 3

Different types of Business Combinations

Business combinations can be categorized into the following four types:

1. Vertical combination

This is a business combination wherein various departments of large industrial units come together under single management. Under this business combination all the stages, from purchase to selling of product, are linked by units. The key objectives of a vertical combination include:

i. minimizing the per unit cost

ii. elimination competition

iii. hiring the experts’ services

iv. supplying goods at lowest prices

v. avoiding over production

vi. improving production methods

vii. achieving large scale benefits

viii. finding proper market for their product

ix. supervising the management

x. reducing the middleman commission

xi. earning maximum profit

2. Horizontal combination

Also referred as voluntary combination, it is an association of two or more business units of same nature under a single management. Both the business units involved in combination are engaged in same activity and their combination is, therefore, referred as horizontal combination. The key objectives of this business combination are the same as those of a vertical combination.

3. Circular combination

This business combination type involves different business units coalesce themselves under a single management. For instance, a shoes industry combining with cloth and sugar industry exemplifies mixed combination. The key objective of this benefit is securing the benefits of administrative ability by the way of common management.

4. Diagonal combination

A diagonal business combination involves two or more business entities performing subsidiary services combining themselves under a single management. The key objective of this amalgamation is making the business unit large and self sufficient.

  

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